Money for the people who depend on you
Life insurance pays out if you die during the term of the policy. That money goes to the people you've nominated, and it's theirs to use however they need to — clearing the mortgage, covering the funeral, replacing the income that's no longer coming in, or simply buying the family time to work out what happens next.
Most people would rather not think about it. But the question underneath is a practical one: if your income stopped tomorrow, could the people who rely on it stay in the house?
The main types
Level term — the payout stays the same for the whole term. Useful for families who want a fixed amount available whatever happens, or for anyone on an interest-only mortgage where the debt isn't reducing.
Decreasing term — the payout reduces over time, roughly tracking a repayment mortgage. Premiums are usually lower, because the sum assured is falling as the debt falls.
Increasing term — cover rises over time, either by a fixed percentage or in line with inflation, so its real value doesn't erode over a 25-year policy.
Cover that pays a monthly income instead of a lump sum is covered under Family Income Benefit .
Working out how much you need
There's no standard answer. We'll look at:
- What's outstanding on the mortgage and any other debts
- How many years of income the household would need to replace
- Childcare and education costs
- Any death-in-service benefit from your employer, which often covers less than people assume
- What you can realistically afford each month, since cover you can't sustain may not be there when it's needed
What affects the premium
Several things are taken into account when working out the cost of your life insurance. The main factors include:
Age
Your age when you take the policy out can have a significant effect on the premium.
Health
Your health and medical history can affect the cost of your cover.
Smoking
Whether you smoke is one of the factors considered when calculating the premium.
Occupation
Your occupation is taken into account when assessing the policy and its premium.
Amount of cover
The amount of cover you choose will affect how much you pay for the policy.
Length of term
The length of time you want the policy to run also affects the premium.
Age can make a difference
Age can matter more than people expect — taking cover out in your early thirties rather than your early forties may make a noticeable difference across the life of the policy.
Cover with no end date
Most life insurance runs for a fixed term. If you're still here at the end of it, the policy simply stops and nothing is paid. Whole of life works differently: provided the premiums are maintained and the policy terms are met, it is designed to pay out whenever you die, at whatever age.
That certainty is the point — and it's why premiums are higher than term cover for the same sum assured.
Why choose whole of life?
Unlike fixed-term cover, whole of life is designed to remain in place throughout your lifetime, provided the premiums are maintained and the policy terms are met.
What it's typically used for
Inheritance tax
If your estate is likely to face a bill, a whole of life policy written in trust may provide the funds to help pay it.
Held in trust, the money would generally sit outside the estate and reach your executors without waiting for probate, which can reduce the risk of the family having to sell assets to settle the bill.
Funeral and final expenses
A set sum intended to ease the cost and the immediate financial pressure on the people arranging things.
Leaving something behind
A defined legacy for children or grandchildren, or an equalising payment where one child inherits a property and another doesn't.
Business protection
Cover that isn't tied to a fixed term, where a shareholder or key person arrangement needs to last.
Guaranteed or reviewable
Guaranteed premiums
Guaranteed premiums are fixed for the life of the policy, so you know what you'll pay and what the policy is set to pay out.
Usually more expensive at outset, and often the more predictable choice.
Reviewable premiums
Reviewable premiums start lower but are reassessed periodically, usually every five or ten years.
They can rise significantly in later life — sometimes to the point where people give up the policy at the age they most need it.
Think about the later years
If you're considering reviewable cover, understand what the premiums could look like at 75 before you commit.
Think about the long term
This is long-term cover with long-term implications. Stop paying and you generally lose the protection.
The amount of cover needs to make sense against a future estate value, not just today's.
And where inheritance tax is a consideration, it should be looked at alongside your wider arrangements.
Getting it right
Life cover is one of those things that's easy to buy badly. The wrong type, the wrong term, the wrong sum assured, or no trust in place may all reduce what your family actually receives.
Speak to one of our advisers and we'll build it around your circumstances.
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